Diapers.com with $180M in annual sales to launch Soap.com

John O’Boyle/The Star-LedgerDiapers.com chief operating officer Vinit Bharara and chief executive officer Marc Lore, pictured inside the company's Jersey City headquarters, have come a long way since the refurbished paper mill that served as their first office in Montclair just five years ago. It sounds like a wistful memory from the dot-com heyday: Two new dads, tired of trekking to the market for diapers, start a Montclair-based online retailer. Diapers delivered fast, cheap and in bulk quantities are the initial hook.

It is a recipe that annihilated eToys, Pets.com and other giants of the dot-com bust.

But five years after launching their dubious enterprise, Marc Lore and Vinit Bharara appear to have beaten the odds. They have raised $60 million in venture capital, hired 400 employees, moved into a stylish Jersey City high-rise and now are sitting on top of a $300 million company.

“We are just killing it in the baby sector,” said Lore, 39, the barrel-chested former track star who is chief executive of Diapers.com. He sat in a conference room with panoramic views of the Manhattan skyline — a far cry from the refurbished paper mill that served as his office in Montclair.

“No one’s going to beat us on the bread and butter of what new moms need,” added Bharara, 39, the firm’s chief operating officer. He said Diapers.com is among a handful of dot-coms that — thanks to improvements in shipping technologies — are selling bulky commodity items at prices low enough to compete with big-box retailers, and shipping them overnight to customers for free.

They credit the company’s success to warehouses that function on robotics and algorithms, an obsession with customer service and the sheer novelty of an online-only baby gear retailer.

Now, Lore and Bharara — best friends since they were fifth-graders in Tinton Falls — are eyeing a market of shoppers who spend billions to buy cosmetics, toiletries and everyday household items.

In what they call “one of the biggest internet retail launches in history,” the two entrepreneurs last week unveiled Soap.com. When the website launches in early July, it will offer 25,000 products — ranging from toothpaste to makeup to cleaning supplies — for less than typical drugstore prices, complete with free overnight shipping.

“This is not shoes or fashion or a sexy social media play,” said Bharara. “This is for everybody and we think we can change the way America buys these goods.”

Disposable, not cloth

Lore and Bharara said their new venture hinges on their existing business model, which dates to the early days of Diapers.com.

Both had successful, albeit conventional, careers before they hatched a plan in 2000 for their first startup.

Lore was the chief risk officer for a large Japanese bank, while Bharara logged long hours as a lawyer on Wall Street.

Their firm, an online sports card outfit, was soon bought by the baseball card company Topps. With two toddler daughters, Lore had diapers on the brain. He called 1-800 Diapers on a whim only to discover that it sold cloth diapers, not the disposable brands — Huggies, Pampers and Luvs — he and his wife were used to buying.

Bharara, who had just wed, wasn’t far behind. The two friends bought the name and phone number for $25,000 and, while keeping their day jobs, began transforming the business into the baby- gear behemoth it is today.

“We had this panoply of characters,” said Bharara, sitting in a conference room called “Gina’s Garage,” after a friend whose house served as a makeshift distribution center. They rented an 18-wheeler truck and maxed out their credit cards buying diapers at BJ’s and Costco stores along the East Coast.

They hired a Russian nuclear scientist and a Chinese software engineer who fled his country after Tiananmen Square to build the back-office systems.

They tripled sales in 2007 to $36 million and the firm has since maintained its breakneck growth.

Today, Diapers.com boasts $180 million in annual sales and a database of 1 million American mothers who have bought from them.

Robots with diapers

The firm’s three warehouses are fully automated and use a fleet of robots — industrial shelves on wheels — to fulfill orders fast.

And rather than just stuffing packages of diapers into boxes that are roughly the right size, Diapers.com wrote software to analyze a customer’s order and choose from 20 different boxes to avoid UPS’s oversized shipping fee.

Their model is to save on shipping costs by bundling such low-margin items as Diapers with more profitable baby goods such as lotions, bottles and formula to fatten the bottom line. That loss-leader strategy is an old brick-and-mortar trick, said Virginia Lee, an analyst at the global research firm Euromonitor.

“I’m just concerned about how sustainable that model is,” she added. “It costs a lot to ship these products for free.”

Lore insists the model “is economically viable,” adding that much of the company’s available cash is going towards its $20 million marketing budget and plans for expansion. Soap.com, for example, will require 2.5 million square feet of warehouse space and at least 20 new employees a month as the business grows, he said.

Lore and Bharara are pinning their hopes on the cachet of the Diapers.com brand, which they believe will lure shoppers to Soap.com.

“Almost everybody we talked to thought Diapers.com was a crazy idea,” said Lore. “But we believed in it and we made it.”